Breach a Warranty and Lose Coverage

Court Enforces Insurance Warranty to Avoid Acting as a Privateer

Although I usually report on new cases, this time I return to an early decision that goes back to before the U.S. Constitution that explains how important the covenant of good faith and fair dealing has been to American Jurisprudence from the beginning our the United States. The covenant is implied in every insurance contract and has done so for centuries. The Court of Common Pleas in 1786, ruled on an insurance claim in its first year of reporting on the decisions of American courts, and upheld an insurer’s warranty because the promise was made and needed to be kept.

In Ogden v. Ash, Court of Common Pleas, Philadelphia County, 1 U.S. 162 (Dall.) (March Term, 1786) an action upon a policy of insurance wherein the single question was, whether a warrant inserted in the policy, had been complied with on the part of the insured, or not.

FACTS

The policy in this case, is on the outward bound voyage, wherein it is warranted “that orders will be given that the Ship shall not cruise.” (In the terminology of the time, to cruise, is to act as an armed merchant ship, licensed by a letter of marque to cruise against enemy ships to her owners’ profit}. Since the ship in question mounted 16 guns, it could act as a privateer and the insurers did not want to take the risk it would be lost in combat.

The orders which were given consist of instructions which, in the former part, relate to the outward bound voyage, and, in the latter, to an intended cruise for two or three months, after the outward bound voyage, which was the sole object of the insurance, should be completed. The instructions with regard to the outward bound voyage, begin with an account of the cargo, to whom it is consigned, and give the usual directions in mercantile voyages, how it is to be disposed of, and how the proceeds shall be applied. The captain is expressly directed not to touch at any port to the southward of Philadelphia, lest the insurance should be endangered, but no mention is made of a cruise, except that the goods are to be sold for the purpose of fitting her out afterwards for a cruise.

ANALYSIS

If the warranty had been that no orders should be given to cruise, or that he should not be impowered (old spelling) by his orders to cruise, these instructions would certainly have been a compliance with the warranty; but the warranty is not negative, that he should not have orders to cruise, but positive that he should have orders not to cruise. And in which ever way the warranty had been expressed, if the captain had cruised, and the vessel by that means had been lost, he would have been answerable so that the responsibility of the captain, is not any rule to govern the construction of the policy, because if he had cruised without orders, he would have been equally liable, as if he had cruised contrary to express orders.

The underwriters have stipulated that more should be done, than would barely make the captain answerable for cruising.  It is well known, that there have been many captains who have not scrupled to break orders which were plain and express.

In the present case, the condition of the Vessel did not preclude the possibility of cruising. She mounted 16 guns, she had leave, by the terms of the policy, to call at Beaufort for men, she was intended to be a cruising vessel after the outward bound voyage was completed, and it might not be an unreasonable suspicion in the underwriters, that the captain, unless expressly restrained, might be tempted to cruise in the outward bound voyage.

Whatever their reasons were, the underwriters had certainly a right to make it a part of their contract; without it, they might have refused to insure at all, or they would perhaps, have demanded a higher premium; and therefore being stipulated, the owners should have complied with it.

These warranties in policies of insurance are required by law, and by the constant usage of merchants to be strictly complied with; they are generally expressed in a few words, but where they are plain and clear, it would be of dangerous consequence to this useful branch of mercantile business, to introduce a loose construction of them.

ZALMA OPINION

The court concluded that upon the case stated, and a view of the policy and orders, that the warranty has not been complied with, and that judgment should be given for the defendant.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

 

 

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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